Provisions Affecting Individual Accounts

The current Social Security program is a defined benefit social
insurance program. Monthly benefits for a worker and his/her
eligible dependents are determined based on a formula that takes
into account the worker's earnings history. The program is financed
on a pay-as-you-go basis. The contributions of all workers each
month are used to provide these benefits to eligible retirees,
disabled workers, and survivors in the same month. In contrast,
individual accounts would provide benefits based solely on each
worker's own contributions (plus contributions by the employer)
made to the account plus investment earnings on these contributions.
Individual accounts are thus funded on a wholly advance-funded basis.

Contributions to the individual accounts can be financed by the
following means: (1) a redirection of some portion of Social Security
payroll tax, (2) transfers from the General Fund of the Treasury,
(3) additional contributions from workers (and/or the employers),
or (4) some combination of the above. In addition, individual
accounts can be mandatory or voluntary.

Many of the individual account provisions included in recent solvency
proposals would redirect some portion of each participating worker's
Social Security payroll tax to an individual account and later pay a
reduced traditional monthly Social Security benefit. Some plans base
the amount of reduction, or "benefit offset", on a hypothetical or
shadow account balance accumulated to retirement (or to entitlement
to disability benefits in some proposals). The rate of return at
which hypothetical accounts accumulate is generally set at a level
such that workers should have a good chance of doing better with
their actual investments over a working lifetime. These "benefit
offsets" are a source of savings to the Social Security trust funds.
Individual account provisions of this type generally do not, in
themselves, improve the solvency of the Social Security trust funds.
As a result, some proposals often include some additional revenues
(like General Fund transfers) for a period of years before the benefit
offset provision has matured.

The size of the individual accounts (i.e., the percentage of taxable
earnings invested in individual accounts), how the accounts are funded,
and the specifications of any "benefit offset" provision can cause
considerable variation in the long-range financial effect of individual
accounts on the Social Security program.
Several comprehensive solvency proposals
provide examples of proposals that include individual accounts.